New auto launches doing well – M&MMrunmayee Jogalekar
Update on the Indian Equity Market:
On Tuesday, NIFTY closed 0.1% up at 16,280. Top gainers in NIFTY50 were BHARTIARTL (+3.8%), TECHM (+2.8%), and HDFC (+1.8%). The top losers were SHREECEM (-4.1%), JSWSTEEL (-3.6%), and TATASTEEL (-2.8%). The top gaining sectors were IT (+0.9%), FINANCIAL SERVICES (+0.3%), and HEALTHCARE (+0.2%) while the top sectoral losers were METAL (-2.8%), PSU BANK (-2.6%), and MEDIA (-2.4%).
New auto launches doing well – M&M
Excerpts of an interview with Dr. Anish Shah, MD & CEO of M&M, aired on CNBC-TV18 on 9th August 2021:
- M&M reported an exceptional loss of Rs 800 mn in 1QFY22. This hit was on account of residual impairment of past investments. Management does not expect such hits going forward.
- In 1QFY22, M&M’s market share in domestic tractors has gone up by 260 bp to 41.8%. M&M has been ahead of the industry in price hikes, and market share gain has not come at the expense of margins.
- M&M has already taken 3 price hikes in this year and is not looking at further increases.
- Demand is picking up but supply chain is facing issues and has not reached normalcy yet.
- Indian tractor industry registered a strong growth of 27% in FY21. Against that, M&M has guided to tractor industry growth of 3-5% for FY22E. Looking at history, management thinks there could be some demand correction. Not seeing any pressures on demand on ground today, but looking at uncertainties, management is being conservative.
- On the planned sale of investment in Ssangyong, management said a number of buyers have expressed interest. M&M has taken enough provisions so there is no further hit expected.
- Restructuring has been completed in terms of categorizing entities in groups. Going ahead, M&M plans to continue the fiscal discipline. If entities in Category A & B don’t adhere to set standards, management will categorize them in Category C. (Reference: In an effort to improve consolidated performance, M&M had categorized all loss-making international subsidiaries into 3 categories. Category A (had a clear path to profitability), Category B (had a quantifiable strategic impact), and Category C (had an unclear path to profitability that mandated an exit and initiation of an appropriate action plan for the same)).
- Categories A & B have performed well in 1QFY22 and the turnaround is visible. Category A companies reported a profit of 300 mn in 1QFY22 vs a loss of 1,030 mn in 1QFY21. Category B companies reported a profit of Rs 310 mn in 1QFY22 vs a loss of 170 mn in 1QFY21.
- M&M’s new products such as Thar, XUV 300, Bolero neo are doing well along with older power brands. M&M is seeing good demand across segments including in pickup trucks.
- In the EV space, M&M sells the most vehicles in India.
- EV adoption in 3-wheelers is going well- the 3 important factors of cost parity, range anxiety and charging/ battery swapping infrastructure have been addressed for 3-wheeleres. EV adoption in 4-wheelers will still take some time.
- M&M is in the process of outlining plans for a 4-wheeler EV platform which will enable them to design high capability 4-wheelers. Battista, which is the electric car being launched by M&M’s subsidiary Pininfarina, has among the best technologies in EV. M&M will look to bring that technology in Indian cars as well.
- On capacities, M&M has adequate capacities in the automotive segment. Management could look into adding capacities in Tractor segment and has earmarked Rs 30,000 mn over next 3 years for the same. Management has also earmarked Rs 30,000 mn over next 3 years for EV investments.
Asset Multiplier comments:
- EV is the big trend which will shape the future of auto industry globally. Auto companies across segments have been increasing investments in the EV space. While most players are moving in the right direction, how the competitive landscape shapes up over the next few years is anybody’s guess.
- Rural India has been impacted due to the 2nd wave of covid-19. Despite the forecast of a normal monsoon for the 3rd straight year, tractor demand could come under pressure considering impact in rural India.
Consensus Estimate: (Source: market screener, investing.com websites)
- The closing price of M&M was ₹ 786/- as of 10-August-2021. It traded at 20x/ 17x/ 15x the consensus earnings estimate of ₹ 39.0/ 45.6/ 51.7 for FY22E/23E/24E respectively.
- The consensus price target is ₹ 948/- which trades at 18x the earnings estimate for FY24E of ₹ 51.7/-
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